Coherent (COHR) Q3 2025: Networking Revenue Jumps 45% as AI Data Center Demand Drives Portfolio Shift
AI data center and telecom strength propelled Coherent’s networking segment up 45% YoY, offsetting industrial softness and fueling gross margin expansion. Strategic portfolio pruning, capacity investments, and cost discipline are reshaping the business mix for long-term growth, with management signaling ongoing demand visibility and further innovation in optical technologies.
Summary
- Networking Outpaces Legacy Segments: AI-driven data center and telecom growth is now the primary earnings engine.
- Portfolio Optimization Accelerates: Exit from non-core silicon carbide and asset sales sharpen focus on scalable, differentiated tech.
- Gross Margin Expansion in Focus: Cost reductions and pricing leverage are driving margin gains despite mix and macro caution.
Performance Analysis
Coherent’s Q3 results highlight a decisive shift toward high-growth networking markets, with revenue up 24% YoY to $1.5 billion and networking segment sales surging 45%. This performance was powered by continued strength in AI data center demand and a third straight quarter of telecom growth, while industrial and materials segments remained relatively flat or contracted. Non-GAAP gross margin improved to 38.5%, reflecting both higher volumes and the early impact of the company’s margin optimization strategy, which includes product cost reductions, yield improvements, and pricing actions.
Segment dynamics reveal a clear pivot: Networking now accounts for the majority of growth, while lasers and materials lag. The laser segment grew modestly YoY, driven by display and semi-cap equipment, but was offset by weakness in broader industrial demand. Materials revenue declined as consumer electronics softness persisted. Operating leverage was evident, with non-GAAP operating margin reaching 18.6%, and debt was reduced by $136 million, lowering leverage to 2.1x. Restructuring and portfolio actions incurred $74 million in costs, but set the stage for improved capital allocation and future profitability.
- Networking Segment Outperformance: AI data center and telecom drove 10% sequential and 45% YoY growth, far outpacing other units.
- Margin Levers Gaining Traction: Product cost reductions and pricing optimization contributed to a 490 bps YoY improvement in gross margin.
- Industrial Weakness Persists: Precision manufacturing softness offset gains in display and semi-cap, limiting overall industrial growth.
With AI and optical innovation as growth engines, Coherent is increasingly defined by its networking and datacom portfolio, with industrials now a smaller, more volatile contributor. The transition is supported by both financial discipline and a deliberate focus on scalable, high-ROI opportunities.
Executive Commentary
"Our fiscal third quarter revenue increased by approximately 4% sequentially and 24% year-over-year to a record $1.5 billion, This was primarily driven by ongoing strong AI data center-related revenue growth and a third quarter of growth in our telecom revenue. We also continued to make solid progress towards achieving our gross margin target of operating above 40% on a non-GAAP basis."
Jim Anderson, Chief Executive Officer
"The sequential and year-over-year improvements in non-GAAP gross margin were driven by higher revenue volume as well as benefits from our gross margin expansion strategy, where we saw improvements in both pricing optimization as well as cost reductions, offset somewhat by unfavorable mix."
Sherry Luther, Chief Financial Officer
Strategic Positioning
1. Networking and Data Center Dominate Growth Trajectory
AI and cloud data center demand have fundamentally shifted Coherent’s center of gravity, with record Q3 data center revenue and a robust pipeline for next-gen optical transceivers like 1.6T and 3.2T. The company’s broad photonics portfolio—spanning EML, VIXL, and silicon photonics—positions it as a preferred partner for hyperscalers and telecoms navigating bandwidth upgrades.
2. Portfolio Optimization and Focused Capital Deployment
Exiting non-core silicon carbide devices and divesting underutilized assets signal a disciplined approach to capital allocation. By refocusing R&D and investment on core substrate and epi capabilities, as well as differentiated optical technologies, Coherent is engineering a more scalable and profitable business mix. Asset sales and cost takeouts are expected to yield longer-term margin and efficiency gains, with more detail forthcoming at the upcoming Investor Day.
3. Manufacturing Flexibility and Supply Chain Resiliency
Coherent’s global manufacturing footprint—over 60 sites across 14 countries, half in the U.S.— provides insulation from tariff volatility and supply shocks. Vertical integration in key components (notably EML and CW lasers) enhances control over quality and capacity, with a major six-inch indium phosphide ramp slated for next quarter to support both cost reduction and scalability.
4. Margin Expansion Playbook and Early Results
Gross margin improvement is being driven by a multi-pronged strategy—cost reduction, pricing optimization, and yield gains. While product mix remains a near-term headwind, management is clear that the margin expansion journey is in its early stages. The company expects to deliver further gains as portfolio actions and new capacity come online.
5. Innovation Pipeline and Customer Engagement
Coherent’s technology roadmap is resonating with customers, as evidenced by multiple awards at OFC and deepening engagement around next-gen 1.6T and 3.2T transceivers. The upcoming optical circuit switch (OCS) launch, leveraging digital liquid crystal technology, is poised to expand addressable market and TAM in data center switching.
Key Considerations
Q3 marks a pivotal quarter in Coherent’s evolution, with networking and datacom now firmly at the center of the business model. Investors should weigh the following:
Key Considerations:
- AI Data Center Momentum: Sustained demand for high-speed optical transceivers is expected to drive both top-line growth and share gains over the next several quarters.
- Portfolio Restructuring Impact: Near-term restructuring costs are offset by a more focused, higher-margin portfolio and enhanced capital discipline.
- Manufacturing Investments: The six-inch indium phosphide ramp is a critical enabler for capacity, margin, and supply chain resilience.
- Gross Margin Levers: Product cost reduction, yield improvement, and selective pricing power are driving early gains, but mix and macro caution remain watchpoints.
- Industrial Segment Volatility: Ongoing softness in precision manufacturing and consumer electronics tempers the outlook for legacy businesses.
Risks
Macro uncertainty and industrial demand weakness remain the most significant external risks, with management taking a cautious stance on near-term outlooks for these segments. Product mix and unfavorable market shifts could pressure margins, while competitive intensity in optical components and potential supply chain disruptions (despite current resiliency) are ongoing concerns. Portfolio transition and restructuring may introduce execution risk as non-core exits and asset sales proceed.
Forward Outlook
For Q4 2025, Coherent guided to:
- Revenue of $1.425 billion to $1.575 billion
- Non-GAAP gross margin of 37% to 39%
- Non-GAAP EPS of $0.81 to $1.01
For full-year 2025, management maintained a strong growth outlook, emphasizing:
- Continued AI data center and telecom strength as primary growth engines
- Gross margin expansion as a key operational focus, with additional color expected at the May 28 Investor Day
Takeaways
Coherent’s Q3 results confirm a business model pivot toward high-growth, high-margin networking and datacom markets, with disciplined portfolio pruning and targeted manufacturing investments underpinning future scalability.
- Networking and AI Data Center Now Core Earnings Driver: The shift away from legacy industrials is accelerating, with optical innovation and customer wins fueling growth.
- Margin Expansion Strategy Is Working, But Early: Cost and pricing levers are delivering, but mix and macro headwinds require continued vigilance.
- Execution on Portfolio Realignment and Capacity Ramp Will Be Key: Success in these areas will determine whether margin gains and growth are sustainable as the business mix evolves.
Conclusion
Coherent’s Q3 marks a clear inflection toward a more focused, scalable, and resilient business, with networking and datacom at the forefront. While macro and mix risks persist, the company’s innovation pipeline, margin playbook, and portfolio discipline position it for continued long-term growth and profitability.
Industry Read-Through
Coherent’s outperformance and portfolio shift signal a broader industry trend: optical networking and AI data center demand remain robust, with hyperscaler and telecom upgrades accelerating. Players with broad photonics portfolios and manufacturing flexibility are best positioned to capture share, while legacy industrial and consumer electronics exposure remains a drag. Margin expansion via cost, pricing, and capacity investments will be a key differentiator across the photonics and semiconductor supply chain, as customers and investors reward focus and scale in high-growth optical markets.